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Capital Market Interview Preparation Guide

Capital Market frequently Asked Questions by expert members with experience in Capital Market. These interview questions and answers on Capital Market will help you strengthen your technical skills, prepare for the interviews and quickly revise the concepts. So get preparation for the Capital Market job interview

62 Capital Market Questions and Answers:

Net present value (NPV) is a financing term which shows the cash flow worth for both inflow and outflow and it is been defined as the sum of the present values of cash flow. NPV is formulated as future cash flow subtracted from the purchase price. It is also the tool to calculate discounted cash flow and is a standardized method for the analysis of capital budgeting. The advantages and disadvantages of it are as follows:-

The advantage of NPV is needed for long term projects and it measures the excess or shortfall of cash flows as it is used for the reinvestment at the discount rate which is used for this.

The advantage is that the adjustment for this is a bit risky and it adds a bit of difficulty in making the cost higher.

Profitability index (PI) is also known as profit investment ratio (PIR) and also termed as value investment ratio(VIR) which tells that a proposed project will have the ratio of payoff to investment. It is like a tool which is used for ranking projects and it allows quantifying the amount of value created per unit of investment. If the value of profitability index is less than 1 then accept the project and if it is greater than one then reject the project. Another way to calculate the profitability index is future cash flows divided by the initial investment.

Internal rate of return is used to calculate the even break point which is also an alternative way to calculate the cost of capital and it includes the risk premium. It is the rate of return which is used in capital budgeting which gives the indication of the profitablility of investments. This is also called as discounted cash flow rate of return. This can't be used for mutually exclusive projects where the selection can be done to only one project rather than both the projects.

1) It has long term implementations which can't be used in short term and it is used as operations of the business. A wrong decision in the early stages can affect the long-term survival of the company. The operating cost gets increased when the investment of fixed assets is more than required.

2) Inadequate investment makes it difficult for the company to increase it budget and the capital.

3) Capital budgeting involves large number of funds so the decision has to be taken carefully.

4) Decisions in capital budgeting are not modifiable as it is hard to locate the market for capital goods.

5) The estimation can be in respect of cash outflow and the revenues/saving and costs attached which are with projects.

Accounting rate of return is also know as Average rate of return which gives the financial ratio used in capital budgeting. The ratio takes time value of money factor which calculates the return and the net income can be generated from the proposed capital investment. It is used to show the percentage return. The formula of computation is:

Period is not involved with the time value of money and it doesn't even get considered whereas discounted pay back period is another form which involves this and have the real value of cash inflows which are measured in current amount of money which are given as a discount amount. The rate with which they are given at any interest rate are called as Discount rate.

Payback period= year before recovery+ unrecovered cost at the start of year/ cash flow during the year

The techniques which are available for the evaluation of capital expenditure proposal depend on the management which has to select and have the profitable proposal out of different proposal under study. The technique which is used are as follows:-

1) Degree of urgency method

2) Pay back method

3) Rate of return method which is not adjusted properly

4) Present value method which is adjusted through time and it also includes net present value method.

In the case of pay back period technique which is used for evaluation of capital expenditure proposal in which the cash inflows are even and constant and the period can be computed by dividing the original investment to the annual cash-inflow. This can be also represented in number of years which are required to recover the original cash which has been invested in the project. This the method which is used to measure the period of time as it takes for the original cost of the project which has to be re3covered from the earning which are additional to the project.

Time value of money is the value which is earned over a given amount of time in terms of interest. For example if Rs. 200 money will be invested for about 1 year then the earning will be of 5% interest which will be worth 205 after one year. So using this time value of money terminology the future value can be predicted.